The FCC program to reimburse U.S. service providers for removing and replacing existing Huawei and ZTE gear is facing a $3.7 billion funding shortfall, and absent additional Congressional support near-term, the program’s goal could be in jeopardy as carriers themselves are left in limbo.
Based on initial data for what it would take to swap out Huawei and ZTE gear from existing networks Congress in 2020 already allocated $1.89 billion for the FCC’s reimbursement program to carry out the Secure and Trusted Communications Act of 2019.
Chinese vendors Huawei and ZTE were deemed a national security risk by the FCC, and the goal of the effort is to get risky equipment out of U.S. networks, with the government repaying carriers for the costs of doing so. After initial review of 181 applications for reimbursement, which were due at the end of January, the FCC upped the estimated cost, which now stands at $5.6 billion.
Amounts requested vary from as little as $14,400 by Northern Cambria School District, to as high as $1.19 billion by Viaero Wireless. Fourteen applicants (excluding Viaero) are requesting amounts above $100 million, while 21 are seeking less than $1 million, with the rest spread out in between.
Initial reimbursements can start June 15, 2022, which is when the FCC needs to certify approval of applications. In the meantime the agency is reviewing and going back to carriers with questions about estimates. But without the full amount available, uncertainty leaves some carriers, most of whom are smaller and rural providers, in a tough spot to complete or even get started.
If the program isn’t fully funded by the middle of this year, reimbursements are supposed to be doled out on a prorated basis under rules that prioritize service providers with fewer than 2 million customers.
All of the rip and replace participants have fewer than 10 million customers, while most fall in the category of less than 2 million, and many still have fewer than 150,000 subscribers.
The FCC is hoping to get additional funding in the next year, and lobbying efforts by the likes of the Competitive Carriers Association (CCA), which represents smaller and rural carriers, are underway.
‘Grinding to a halt’
Armand Musey, president and founder at consulting firm Summit Ridge Group, is advising seven carriers, that range in sizes including Viaero Wireless, throughout the complex reimbursement application process from start to finish. He categorized the shortfall as a big problem, telling Fierce he’s unsure if the FCC or Congress fully realizes the situation carriers are facing.
“Given the fact that most of these rural carriers are very thinly capitalized and have very small margins, they’re not really able to commit to starting this program if it’s only one-third funded,” said Musey, speaking about the program generally and not specific clients.
And even those that do want to get started, vendors in many cases aren’t willing to provide large quantities of equipment because they know they might not get paid if carriers aren’t fully reimbursed by the government, he said.
“So to a certain extent, at least with many of the carriers, the process is kind of grinding to a halt.”
Tim Donovan, SVP of Legislative Affairs at CCA, told Fierce that the group and its affected members are engaged with Congress to get the program fully funded, saying they are becoming increasingly aware, including Congressional leaders, as well as other members especially those representing states with covered equipment in their networks.
“It’s a serious shortfall and could mean the success of the program being at stake,” Donovan said of the deficit, particularly for smaller providers that can’t absorb the costs themselves.
Carriers are in different positions in terms of how much equipment needs to be changed out, whether it’s a few pieces or an end-to-end swap out, and what network configurations they have. However, all affected members would be harmed by only getting repaid on an extremely reduced prorated basis, according to Donovan.
“For some of them that could mean not being able to complete the program at all, and even shuttering their business,” he continued.
Steven Berry, CEO of CCA, noted that if carriers take a penny of the new money they need to cover the program, then they agree to take out all of the insecure network gear and replace it with approved equipment. If they don’t have millions of dollars to take advantage of, they’re not going to use the program, he said.
CCA’s current lobbying efforts are focused on finding any solutions to get the full amount before that June deadline when prorated amounts would be announced for applicants.
Some of those conversations with Congress, according to Donovan, have been along the lines of it being a national security emergency to rid the U.S. of insecure network equipment. So with more gear covered than initially expected and a funding increase, “ultimately it’s going to make our country safer…to get it all out.”
Donovan said the FCC will be using the full amount of time until the June deadline to review applications and go back to carriers with questions on estimates, but “we have no reason to believe that will be sufficient to bring down the overall demand needed to complete the program.”
Pine Belt Wireless, a small wireless carrier serving western Alabama, expressed a similar sentiment of being put in a bind, in a March 28 letter to the FCC.
The filing said that if funds are allocated on a pro-rated basis without the full amount, it would ultimately lead to “two and only two choices for many operators: (1) attempt to continue to operate using insecure equipment and thereby essentially “turning a blind eye” to the national security issue: or (2) shutter significant portions if not all of their networks – an option that runs totally counter to another high-priority public policy objective, that of eliminating the digital divide by making better, faster, more affordable broadband available to all Americans.”
Why were initial estimates so far off?
So how did the amount needed to get Huawei and ZTE equipment out of U.S. networks balloon by more than $3 billion? It appears to be a confluence of several factors at play.
One thing driving the difference from the initial $1.9 billion to current $5.6 billion is the number of companies that applied, according to both Donovan and Musey.
The original data collection involved a subset of about 52 companies that responded to the FCC in an attempt to generate cost estimates associated with installing and removing equipment. Ultimately, more companies were eligible, and the number increased to 181 applicants seeking reimbursement within the filing window, which opened last October.
Musey also believes some parts of applications were likely overstated because they were done early in the process before applicants could do a deep dive network-wise. Estimates were likely based on the cost catalog provided by the FCC, before they could get into details with vendors for things like drone flights for cell towers and equipment.
“When you get into the details, all kinds of other things become apparent” like modifications to towers, or the need to replace downstream equipment when removing a piece of Huawei gear to ensure there aren’t compatibility issues.
Still neither Donovan nor Musey expect there to be a significant reduction in the amount needed after the FCC fully reviews initial applications.
Compounding the problem is wider global supply chain issues like a chip shortage that has affected telecom gear, skilled worker shortages and the tight completion timeline for what is a major process for most applicants. Congress has given participants one year from their initial reimbursement to complete the rip and replace process (so if they get an initial reimbursement in August 2022, they have until August 2023, or later depending when they file). The FCC has the ability to grant a blanket six-month extension, as well as individual extensions but hasn’t done so yet, although groups including CCA and the Rural Wireless Association (RWA) have urged (PDF) the commission to do so.
Donovan also noted that when it comes to supply chain issues, both for chips for telecom gear as well as other elements like HVAC systems and cement, those are going to get more difficult as more broadband infrastructure programs come online and there’s even greater demand for equipment.
Carriers can’t “get in and out of line,” he pointed out, in terms of being able to queue up orders for equipment and getting it delivered based on if and when more money comes in.
They are also working in areas that aren’t as densely populated, where labor crunches can be exacerbated.
And while a longer time to complete projects will likely be needed, and could provide some supply chain issue related price relief, it doesn’t address the immediate funding gap or make the $1.9 billion sufficient, in both Musey and Donovan’s view.
So without the certainty of funds, Musey said some are sitting and waiting to see what Congress does, as they can’t start a project if they’ll only be able to see it partway though.
Some participants have publicly announced suppliers, such as Triangle Communications, a Montana-based provider, which is using Mavenir; Colorado-based Viaero, which is using Ericsson; and Union Wireless, which has tapped Nokia for sites in Wyoming, Colorado, Utah and Idaho.
As CCA’s Berry and representatives of members Viaero, Cellular One, United Wireless and others described in a March 3 ex parte filing (PDF), “several members have even proactively replaced covered equipment, investing significant funds into securing their networks” and “the financial burden to cover the remaining two-thirds of completing the program could prove financially ruinous...”
Musey echoed a similar sentiment, saying that having to go out of pocket to order equipment and not get reimbursed “is enough to bankrupt some of the smaller carriers, and the equipment providers know there’s not really much they can foreclose on.” While some companies might be able to shoulder the burden, it’s not likely for those with a lot of equipment, he continued.
And if carriers want to start work on June 15, they need to put orders in today or as soon as possible to handle crews and all the other elements of network projects.
For smaller carriers that don’t have huge finance departments, to handle the working capital to place orders some will need to get bank facilities, Musey explained. But to do so takes time and banks will want some assurance that government money will indeed come in. So in terms of funding “the sooner the better.”
Open RAN the solution?
In looking to address the funding shortfall, one vendor participating in the process, Mavenir, sent a letter to the FCC proposing a seemingly simple solution: choose open RAN.
Mavenir is a newer entrant that’s been at the forefront of leading open RAN, and has already publicly announced selection by Triangle Communications for its rip and replace process.
In a March 21 letter, Mavenir laid out a table comparing 15 applicants’ cost estimates, including dollars per site. Based on estimates of $420,000 per site using Mavenir tech, the company asserts it could save the program up to $2 billion than is currently requested. Specifically, it says the 15 companies – whose application dollars total $3.258 billion could be reduced to $1.081 billion “if all of the wireless applicants were to use Mavenir’s solution (or a vendor that is similarly cost competitive).”
It said Mavenir’s open RAN solution could be implemented with an average of 40% less capex and 37% less total cost of ownership compared to proprietary solutions of other vendors.
The proposal costs include RAN replacement as well as evolved packet core and IMS for an “apples-to-apples” comparison, although it noted that the latter parts do not need to be purchased as part of a Mavenir solution since they are open and interoperable with other vendors.
However, at least one rip and replace participant, Pine Belt, strongly disagreed with Mavenir’s conclusion.
Pine Belt was one of the companies listed in Mavenir’s chart and responded with its own letter to the FCC on March 28, saying that the software company is just looking to promote itself.
In the filing, Pine Belt acknowledged it “has spent an enormous amount of time and capital working with engineers and negotiating with equipment vendors, including Mavenir, to determine the best and most efficient way to replace its ZTE equipment.”
It contends the recent Mavenir proposal was “based on grossly oversimplified assumptions” as each project is unique and covered equipment requested even more so for variable deployment costs.
Mavenir’s Ex Parte is simply a promotional piece for its equipment and fails to address the real challenges that affected carriers are attempting to address to replace existing equipment, and it significantly misses the mark in addressing the shortfall funding, wrote Pine Belt.
Pine Belt said it engaged with Mavenir directly to submit initial estimates as part of the 2020 data collection. It determined that when looking at RAN equipment only, Mavenir submitted the second highest estimate, and its quote was only 17% lower than the highest estimate the company received.
Asked about open RAN as an option to lower costs, Musey said that while it’s an interesting, promising technology that’s potentially less expensive – his work has shown companies aren’t yet comfortable with open RAN, citing integration challenges to still work through as it’s “not ready for prime time.”
His general feeling is that it will become more attractive in a couple of years, but for the rip and replace program, urgency is key.
Donovan also cited opportunities for open RAN as companies move forward, saying there has definitely been some discussion, but again highlighted the tight timeframe as working against carriers and open RAN, where it may be easier to go with known processes.
“Open RAN is going to continue to be evaluated in this process, but these are some of the smaller companies and may not be the biggest drivers of scales of economy for deploying that,” he said.
Hurting the digital divide
Another potential unintended consequence of not fully funding the program that Donovan and Musey cited is further expanding the digital divide or at least hampering efforts to bridge it, which has been a major U.S. goal as the government aims to get more Americans connected.
Many of the program participants are smaller and rural operators, sometimes the only ones serving a specific area, and while being forced to shutter would clearly be an issue as the U.S. looks to increase broadband availability, the funding shortfall could also delay upgrades to newer technologies.
As part of efforts to get rid of Huawei and ZTE, Viareo has said it’s upgrading more than 900 LTE sites to be outfitted with 5G-ready network equipment, while Union Wireless is upgrading the majority of its network, initially deploying 4G with a path to 5G down the line.
In many cases the equipment being swapped out is older 3G equipment that could be replaced with newer gear, and some carriers would add a little bit of money to further upgrade beyond what they’re repaid for – if the program is fully funded.
For example, Musey noted that the FCC won’t reimburse participants to lay down fiber, but would give them funds to replace a microwave link. Carriers could take the amount repaid for a microwave connection and put it toward fiber instead, while using their own money to make up the difference, delivering a fiber connection that has more capacity and potentially higher reliability.
Those efforts would also be put on delay absent more funding. And with the rip and replace proceeding ongoing for more than two years, some carriers have already been stalled in their networks for some time.
“Some of these carriers have been somewhat frozen in their networks over the past couple of years,” Donovan said.
Huawei and ZTE have largely been driven out of the U.S. market and carriers with covered equipment are left without the network support they need as they wait in limbo on upgrading to new equipment.
“Carriers that are operating [covered] equipment want to be able to get it out as soon as possible so they can keep moving forward with their technology deployment,” he continued.
Betting the farm
It’s not entirely unique for Congress to go back and revisit funding allocations to ensure programs are successful when there’s a shortfall.
Donovan and Musey both pointed to the 600 MHz TV broadcast repack a couple of years ago as a recent example, where Congress funded $2.75 billion the FCC program to repay TV broadcasters for expenses for relocating to new channels as airwaves were auctioned for wireless service.
Musey was also closely involved, helping broadcasters to navigate a similarly complex process, and cited some differences such as less of a shortfall than the rip and replace program, and the TV broadcast industry having higher margins and less capital intensity than wireless. But the government still went back and allocated roughly an additional $1 billion for the process above the original amount.
Importantly, unlike TV broadcasters, smaller and regional carriers are not going to be able to do half of the rip and replace project and simply wait for more funding, he said.
Both Musey and Donovan emphasized the urgency for a fully funded program in order for the effort to remove Huawei and ZTE gear for smaller carriers to succeed. Musey noted that some need to get bank facilities to handle the working capital, and to do so banks need assurances from the government.
Donovan is hopeful that funds will ultimately come through.
“It is a significant amount, it’s important for Congress," he said. "June 15 is coming quickly, we’re working with Congress and trying to identify any possible solutions.”
And Musey said he’s pretty confident the program will get the full amount it needs, though it may be less than $5.6 billion, but acknowledged the issue is timing - and his comfort doesn’t necessarily ease concerns for carriers.
“If you’re a smaller carrier, this is kind of a ‘bet the farm’” scenario,” he said. It’s one thing for him to feel assured that Congress will eventually step in, but “I’m not sure I’d be comfortable betting my whole company on that. And that’s the situation they’re in.”
Linda Hardesty contributed reporting for this article.